Builders can find spec loans with hard money lenders

Still wary of past shaky lending practices and encumbered with regulations (like the 2010 Dodd-Frank Act), traditional lenders are not willing or able to provide speculative construction loans. Unlike the banks, hard money lenders like Veristone are eager to fund such deals. With loan periods that are much shorter than traditional banks, hard money lenders like Veristone are able to adjust to market conditions and evolve their loan products to match market trends. In a market like we have today, with low inventory and high demand, it’s a good time to support builders and their speculative projects – if they fit the right requirements.

There are a few key things to consider when seeking new construction loans from hard-money lenders:

1. Location: Be sure your lender is comfortable with your project’s geographic location. Typically, a private lender will only underwrite new construction if it can actually kick the dirt.
2. The process: Familiarize yourself with the builder’s or subcontractors’ draw process. Individual private lenders can be more liberal and pay a builder directly after a site inspection.
3. Lot lien: Know whether your lender is comfortable with including some or all of the lot cost in the loan. Ideally, a lender wants a lot to be free and clear or at least subordinated to the first-position private-money deed of trust.
4. Down-payment requirements: Ask about the requirements for how much of the borrower’s own money must be in the project. On a spec loan to a builder, that may run the gamut from no money down to 50 percent down with either a free-and-clear or subordinated lot.
5. Rates and fees: Be able to speak in general terms about rates and fees. The typical builder who used bank financing in the past may not be familiar with a six-month loan, 12 percent interest rate and 4 points, for example.
6. Unique loan structure: For builders, hard money lenders can provide funds for their project that would be difficult or impossible to close at a bank. For builders who learn how to work with private-money lenders on construction projects, there are deals to be made. Set yourself apart from the competition by learning about this potentially valuable niche.